How stress can impact our spending decisions

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How stress can impact our spending decisions

Does a stressful situation cause us to spend more? The evidence to date suggests not, but let’s examine the evidence and consider how we might behave under stressful situations.

Our bodies are hard-wired to react and manage stress and protect us against threats from predators and other aggressors. Such threats are rare today. But modern life presents a whole range of new threats, including financial ones.

In a 2016 study published by US-based Rutgers University, people that become stressed were found to be less likely to spend and opted to save as a way of regaining or maintaining some control in their lives.

Scientists have long-known that our bodies produce increased amounts of the hormone Coristol when it is stressed. This causes us to focus our attention towards dealing with a threat and finding solutions to alleviate it. In the case of a severe financial threat, this will lead a person to buy items they deem to be necessities as opposed to items they deem to be luxuries.

All stress is not equal

Depending on whether people feel a sense of control, or not, either can have significantly different spending outcomes. In cases where a person feels that stress has removed their sense of control, they are much more likely to spend strategically. However, where stress still exists but the person feels a sense of control has been restored, this results in quite a different outcome. Here, people are more likely to spend more money.

In the Rutgers study, people who identified being stressed about employment revealed a reluctance to spend on clothing. But where people were stressed about starting a new job, that cohort was more likely to spend in clothes. So, in employment related stress situations, when it came to clothing decisions, we have two completely different outcomes. 

Ways to control stress

The causes of stress are important, especially for those that want to reduce it. Change in life can be a major cause of stress and when it comes to financial wellbeing, there are three primary events that lead to financial stress, those are

  • Loss of income
  • Loss of health
  • Relationship breakdown

The impact of financial stress

According to a 2008 study published by AOL, people impacted by financial stress have a higher probability of suffering from migraines, ulcers and depression when compared to those with little or no financial stress. But the impact of financial stress on our physical and mental health does not stop there. It can also lead to lower workplace attendance and reduced workplace performance; people stressed about money will be distracted!  This can result in a downward spiral and difficult outcomes. Because of this, it is important to recognise the triggers, warning signs and to take action early.

Establishing control

There are some tried and proven steps people can take to reduce financial stress and regain control over their financial situations, those include:

Establishing a budget – Using both the income and expense side of a family budget will serve as an information funnel. It forces a person to gather important information about their financial situation while also helping that person establish their financial bearings. It can act as a powerful source data that can be used to negotiate with lenders and service providers. It can be used to restructure how they spend, how they save and how they manage their money generally.  

Build an emergency fund – there is nothing more permanent than change and while we cannot control the timing of change, we can control how we prepare for it. At a very basic level, an emergency fund is the first line of defence of a person’s financial wellbeing. Best practice suggests it should be sufficient to cover the cost of 3 – 6 months worth of living expenses; some suggest more for longer! But at its simplest, an emergency fund should be sufficient for a person to be financially resilient to get them through a period of change and adjustment regardless of whether it is economic, medical, social or financial.

Seek support – whether the issue causing stress is financial, social or any other reason, it is important those affected seek help. From a financial perspective, there are a range of resources, public and private that can provide various amounts of direction. Citizens Information in Ireland the Citizens Advice in the UK offer a rich source of reference material and tips across a wide range of topics. Where such resources in themselves may not have an immediate solution, they can often provide direction to where support may be available.

Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz

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